When Good Ethics is Good Business - Assignment Example

When Good Ethics is Good Business Nike CEO, Phil Knight, has received both cheers and criticism for the company's international business model. Since 1999, Nike has become a world leader in advocating a United Nations plan for corporate responsibility; yet other interest groups have demanded that Nike receive economic sanctions for skirting the same model it advocates in quest of greater profit. This dilemma is a typical example in modern business culture. There has been a growing consciousness over business ethics and corporate responsibility, yet is tempting for business leaders to focus on short-term demands at the expense of compliance to a wider definition of ethics. There are conflicting studies regarding the link between good ethics and profitability in the short term, however, it does appear that good ethics can help a company achieve a strong long-term business model. Conversely, in the cases of Enron, Parmalat, and Merrill Lynch for example, a business ethics-related scandal can cost billions of dollars and even the destroy a company. Empirically, ethics or the lack thereof, can be a wild-card factor that can either improve or cost a business. More or less, good ethics serve as an insurance policy against corporate implosion and can help establish long-term customer and employee loyalty. In today's business culture, however, profitability is still the trump card, even amongst a trend toward greater corporate social responsibility. To understand what good ethics are, a clear definition of ethics must be made. The reality is that among others, there are two major separate and at times, conflicting paradigms regarding a preferred business model. The prevailing model in modern business, an open-market model, relies philosophically on Adam Smith's lassiez faire approach, that unadulterated market competition will always yield the most effective results. In theory, a pure open market system abhors any form of market interference, as it will only work counter to the maximization of an economic system. On a practical level, this type of competition finds its way into the investment markets. Large corporations are constantly under pressure to showcase their value in the form of stock prices, earnings reports, and prognoses for increased profitability in the near future. It would be considered unethical in this model to interfere with the natural conduct of business. Advocates of this model are by nature, against regulation. The other model, which focuses on corporate social responsibility, is a more holistic approach that includes the social consequence of a company beyond its shareholder obligations. Therefore, good ethics are measured by the benefit to all entities that come in contact with a company directly or indirectly, from shareholders, to customers, to employees, to subcontractors, and to the environment. This type of model, which has been recently adopted by the United Nations, is challenging the traditional bottom-line approach and redefining the meaning of good ethics in business. The open market model has been the prevailing model of big business since roughly 1980, following international economic turmoil, believed to have been caused by an over-regulating economic philosophy from both sides of the Atlantic Ocean. Deregulation, desperation, and temptation have invited many ethics scandals in recent memory, from European scandals in the 1980' and 1990's to the U.S. based global corporate scandals in the early 21st Century. Lloyds of London for example, one of the largest insurances providers in the world, narrowly avoided bankruptcy as a result of allegedly misrepresenting its profitability and the amount of liabilities in the early 1980's to its Names, or wealthy individuals who underwrite their policies. The scandal led to over $8 billion in losses as it rocked London's financial markets, and as Tony Blair claimed, "Lloyd's has committed the largest, most extensive and pervasive fraud in history (McClilntick, 2000)." Another large European company, Parmalat, has been accused by the U.S. Securities and Exchange Commission of forging records of assets totaling at least $4.9 billion, and forcing the company into bankruptcy in late 2003. In addition, the company has been accused of soliciting investment with misleading accounting practices since the early 1990's. SEC officials have claimed it to be, "one of the largest and most brazen corporate financial frauds in history (Citizen Works, 2004). " The late 1990's was a period of economic boom and unprecedented growth in the U.S. business world. With that growth and pressure for short-term results, however, came some of the largest and most blatant scandals of modern business history. While past ethical scandals have weakened companies financially and brought about a small degree of criminal prosecution, these scandals were even more blatant, and the consequences of such activity were the most severe in recent history. The prototypical cases of this era have been those of Enron and WorldCom, with the latter costing investors as much as $200 billion (Callahan, 2004). Both companies falsified financial records and it's top executives reaped huge rewards for creating a false model of profitability. The two companies were essentially destroyed. Enron is undergoing a massive restructuring and it's former executives staring down potential double-digit prison sentences. WorldCom was bought by Verizon in early 2006, and it's former chief, Bernard Ebbers was sentenced to 25 years in prison (Romar et al, 2006). Merrill Lynch, a top securities and financial services firm, was forced to pay a $1.4 billion dollar settlement to investors in 2003 for giving them misleading investment advice. Internal communication indicated that representatives faced massive pressure from management to promote investments, especially in the technologies sector, that the company knew to be unreliable. These technologies companies were also clients of Merrill Lynch, and the conflict of interest was a blatant violation of SEC ethics laws. A culture of cross-promotion and services fraud became business as usual for the company (Callahan, Disc1, tracks 2-4). Pressure to produce a beneficial short-term financial picture attributed to each of these crises, but where does the onus of blame fall for these actions While individual executives have faced criminal prosecution for their conduct, especially in recent times, modern business culture itself seems to be skating on the edge of ethical boundaries as the norm. Author David Callahan states, "Temptations to cheat have increased as safeguards against wrongdoing have grown weaker over two decades of deregulation and attacks on government (Callahan, disc 1, track 15)." It may not be simply a black-and-white case of isolated bad people being corrupted, and more of a result of hyper-competition at whatever cost. As a metaphor, Callahan points out an alarming survey of 401 leading corporate executives, where 82 percent of the respondents admitted to have cheated on a golf course (Callahan, disc 1, track 9). Given that golf is widely considered to be a "gentleman's game," where adherence to rules is a fundamental part of the lore of the game, such an overwhelming survey response is a telling sign of both a systemic problem as well as ethical deficiencies among corporate leaders. The open market system offers much pressure and temptation to cheat, however, this does not mean that the individuals taking part in such corruption should be exonerated either. Without enforceable standards and criminal as well as financial punishments for violators, there can be no expectation of culture change. When was the last time a multimillion-dollar executive resigned his or her position because he or she refused to engage in unethical behavior While this has happened on occasion, it is unlikely a majority of corporate leaders will police themselves without some form of regulation. Not every ethical controversy in today's business climate is as blatant as the aforementioned, nor is shareholder pressures always the direct cause. Nike, for example, has been mired in a labor controversy for decades. The U.S.-based company pioneered the trend of outsourcing labor to the much less expensive Asian labor force for over three decades. While labor wages in these markets are a fraction of what they would be in most western nations, they are usually relatively high compared to average wages in the countries that labor is outsourced to. In addition, Nike has brought much-needed jobs into these labor markets, as workers would have difficulty finding other forms of employment. Proponents of this outsourcing view the practice as creating opportunities for sustainable employment and saving the company money in the process, while opponents view the practice as labor exploitation. Perhaps both are correct to a degree, which is what likely creates the controversy. At the turn of the 21st Century, food giant Nestle' endured global retaliation for admitting it used genetically engineered (GE) ingredients in its production of several different foods to increase efficiency. Even though the U.S. Food and Drug administration deemed the practice allowable, Nestle' products that were GE were initially banned in China, a major importer, among other countries. Motivated by health, safety, and bio-ethics concerns. Greenpeace launched an all out assault that even resulted in the barricading of a Nestle' factory in Hong Kong, as well as sharing in widespread criticism from organizations throughout the world (Shah, 2002). While many companies like Nestle' continue to produce GE food, the practice has been scaled back and more carefully regulated. Given the ethical criticisms of the prevailing business model, there is also scholarly evidence that good ethics can lead to more profitable business, especially in the long term. A landmark study by Harvard business professors John Kotter and James Heskett (1992) looked at the cultures of over 200 companies for more than a decade. Rating companies by the degree in which management focuses on the well being of all of its major constituencies, its customers, employees, and shareholders, Kotter and Heskett separated these companies as having a strong culture or a weak culture. The findings were stark. Those companies with strong cultures amassed a 901 percent return on investment over an 11-year period while those with weak cultures only achieved a 74 percent return (Kotter et. al, 11). This and other related findings in the study provide statistical evidence that good ethics can lead to good business in the long term. A more recent study by the U.K.-based Institute of Business Ethics studied several categories consisting of samples of 41 to 86 companies from 1997-2001. Among other positive indicators, the institute found that companies with a "specific commitment to doing business ethically have produced profit/turnover ratios 18 percent higher than those without such a commitment (Webley et al, 2003)." Although these studies have shown that a focus on ethics can benefit a business, other studies have produced contrary results. Former Johnson & Johnson head, James Burke, conducted one noteworthy study that proved contrary to the Heskett and Kotter project. Burke controlled for companies that demonstrated a commitment to best ethical practices and compared them with those that didn't over a forty-year period. Burke found that the average increase in stock value was only 6.2 percent compared to a more robust 11.3 percent attained by the rest (Longstaff, 1994). University of California professor, David Vogel, has found that there is a cost to doing business ethically internationally, especially in regard to human rights. Citing the recent example where Google has had to balance social conscientiousness with profits and stock values after acquiescing to Chinese authorities' demands to restrict services and share private information with the government (University of California, 2006). This raised concern by human rights advocates for selling out privacy and human rights in China in quest for greater profits. Then, Google suffered a severe stock devaluation and investor anxiety when it refused to give the U.S, government private information in January of 2006. Although the stock is rebounding, leaders at Google find themselves balancing between financial and social concerns. To what degree should large, multinationals corporations be held responsible for social progress To the father of modern economical philosophy, Milton Friedman, believed business to be responsible only for attaining the most profit possible to its investors while staying within the rules of the game. Yet, a growing intellectual trend among the international community holds companies to a much broader and more detailed standard than Friedman. This philosophy, called Corporate Social Responsibility (CSR), finds that large multinational corporations have the capability to bypass almost all national legal harnesses and for this, should adopt a more universal standard that focuses on more than profitability. The European Commission defines CSR as, "a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis"(European Trade Union Confederation, 2005). Influenced to a degree by Marxist business philosophies, CSR is sought as a method of involving all stakeholders resulting from a company's conduct including the labor force, the environment, and the government in nations where the company operates, as opposed to the small number of investors receiving the maximum benefit. The wider scope of ethical standards that CSR employs has highlighted the difference between U.S. and European-centered business philosophies. In January of 1999, Kofi Anan challenged business leaders around the world to voluntarily support a ten-principle standard of business conduct. This plan, called the United Nations Global Compact has legitimized CSR as a business philosophy. Among others the ten principles include respecting human rights and avoiding labor exploitation, supporting collective bargaining and condemning forced labor, child labor, and discrimination. The compact also encourages companies to conduct business in a manner that protects the environment, as well as weed out and discourage corruption at all levels (The ten principles, 2005). Officially launched in mid-2000, the Compact requires its members to submit public documentation of its mission in accordance to the ten principles every two years, as well as reference the Compact in its annual business statements. By mid-2004, 192 of Fortune Magazine's top 500 global companies had joined the Compact, yet while 40 percent of European-based Fortune global 500 companies joined, only 3.1 percent of U.S.-based companies did (Williams, 758). Many U.S. business leaders as well as nongovernmental organizations have criticized the Compact as being superficial, and weakening the principles that it is promoting. U.S. critics are skeptical that adherence to the Global Compact misplaces accountability, placing the responsibility for human rights and environmental abuses from the governmental level, to the corporate level. More or less, they find the Compact to be outsourcing responsibility. They argue that there is no consensus on human rights, as the vague wording will cause controversy in the future. Some Nongovernmental organizations also find fault with the Compact, as a public relations play that will unlikely live up to the spirit of the document. Other critics, general critics of globalization, believe that some countries are better off avoiding any form of globalization. Therefore the existence of the Compact; no matter how high the ethical standards, legitimizes a destructive business practice (Williams, 759) Despite the criticisms, however, members of the U.N. Compact have begun to transform the landscape of global business. Deutsche Bank, for example, has set up a division devoted toward providing small loans to the poor in developing countries to purchase business-related supplies. Fiat and Italian authorities have undergone a new initiative to promote research toward methane-powered vehicles with low emissions. Pharmaceutical giant Glaxo-Smith-Kline runs anti-HIV campaigns throughout the world. Other companies such as Nike and Reebok have transformed their official codes of conduct to include explicit statements toward the proper conduct between the company and its contract labor supply (International Chamber of Commerce, 2002). These initiatives and many others signify the growing awareness of companies to the expectations put on them from outside the typical business-investor relationship. As more companies join the Compact, as Coca-Cola did in March of 2006, pressure may grow for non-members to join, or face public relations consequences. The numerous initiatives that have been undertaken by Compact members is noteworthy, but the most effective result of the Compact will likely be the "sunshine effect," that is, a company's ethical conduct will be exposed throughout the world. Many critics find fault that the lofty goals of the Compact will hardly be followed, and these critics may end up being correct to a point. But, as more companies join, critics may end up on the wrong side of public opinion for not joining. The sunshine effect for may force companies that blatantly exploit labor or destroy the environment to reform or face sanctions, which some are currently advocating for Nike, but there is a large gray area that must be clearly defined. The Nike example is especially poignant, as the aforementioned controversy rests more on philosophies regarding globalization as opposed to the actual conduct of Nike itself. At the same time, public pressure may in time push Nike to raise wages extremely disproportionate to the averages wages in some developing countries. This could lead to a revaluation of labor costs around the world and dramatically push up global wages. Through pure goodwill and public relations maneuvers, companies may raise the ethical bar as a means to compete with competitors. This could change the face of marketing and commercialization. If the Compact results in changing the cultural values toward deeming ethical business as the only form of acceptable business, then the lofty ideals of the compact will be made reality. Steps could be made to resolve philosophical conflicts between financial and social concerns. Foremost, concrete standards of international conduct need to be implemented to avoid a philosophical divide. That will likely take a compromise between profit-driven business interests and socially conscious purveyors of CSR. If that gap can be bridged, a cooperative system can be created in which governments and business share in the responsibility for promoting ethical behavior. At the same time, both entities must compromise on shouldering the financial consequences, if necessary to undergo these changes. Logic and reason seem to be on the side of compromise. It is understandable that those individuals and groups who are risking their personal capital to not want to take responsibility for conditions that a foreign government allows to take place in their country. At the same time, a government should not have to tolerate exploitation of its labor force and destruction to its environment to satisfy the profit motives of foreign businesspersons. A government, for example, could offer tax subsidies for companies that comply with a given standard of labor laws. A company could be mandated to pay a surcharge, based somewhat on the companies estimated labor savings for doing business in such a host country. The surcharge revenue could fund social programs within the host country. There is a myriad of possibilities to be undertaken, but a workable partnership and a compromise must be made in order for them to be effective. While the U.N. Compact offers an optimistic pathway toward ethical behavior in the future, the future is not here yet. London, New York, and Tokyo still remains the nexus of business conduct. The philosophical gap is too wide and "nuts and bolts" investors are unlikely to wager their financial futures on ideals as opposed to results. That doesn't eliminate hope in the future for a wider role for ethics in business conduct, however, as the trend is moving in that direction. It will take time to complete a sea change though, through philosophical compromise and incentives to link ethics with profit increase. The rise to consciousness of ethics in business, like many issues, takes time to sink in. The inherent nature of business is to make money, as it is the key to driving and sustaining itself. Seemingly, the role and nature of business conduct has evolved as globalization matures. Business will encounter challenges between balancing profit and a growing trend toward greater responsibility. Public opinion and cultural norms toward good ethics will have to be utilized in a method conducive with the market forces that keep money going into the economy. Good ethics, to a degree, is good business. It appears to be a growing, more critical factor, but it is not the only factor. As long as the open market system remains the status quo, profitability will be most important. There is not substantial evidence that profitability and ethics are mutually exclusive. There is more than enough room for compromise between those who are profit-focused and those who are socially conscious. The near future will provide interesting insight to the role of ethics in business. Bibliography Callahan, D. (2004). The Cheating Culture [CD]. New York: Harcourt/Recorded Books Productions. Callahan, D. (2004). Worldcom. Retrieved Mar. 9, 2006, from The Cheating Culture Web site: http://www.cheatingculture.com/worldcom.htm. European Trade Union Confederation, (2005). Corporate social responsibility. Retrieved Mar. 10, 2006, from ETUC Web site: http://www.newswise.com/articles/view/518292/. Kotter, J., & Heskett, J. (1992). Corporate culture and performance. New York: Simon and Schuster. Longstaff, S. (1994). Is good ethics good business Retrieved Mar. 7, 2006, from St. James Centre for Business Ethics Web site: http://www.ethics.org.au/things_to_read/articles_to_read/business/article_0130.shtm. McKintick, D. (2000, Feb 21). The decline and fall of Lloyd's of London. Time Europe, 155.Retrieved Mar 8, 2006, from http://www.time.com/time/europe/magazine/2000/221/lloyds.html. Shah, A. (2002). A huge wave of public concern. Retrieved Mar. 8, 2006, from Global Issues Web site: http://www.globalissues.org/EnvIssues/GEFood/PublicReaction.aspp=1. The global compact: report on progress and activities. (2002). Retrieved Mar. 9, 2006, from International Chamber of Commerce Web site: http://www.iccwbo.org/home/global_compact/ProgressReport%20July%203.pdf. The ten principals. (2005). 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